Audit Trail

Audit Trail Meaning

An audit trail is a systematic record to trace the source of financial data and provides chronological, documentary evidence of a series of activities and is therefore used to verify the accuracy of data and track transactions.

It answers three basic questions-

• What was the event?
• Who has launched/initiated the event?
• The date and time of the event?

Audit Trail Examples

Below are some of the examples.

Example #1

What would be an audit trail for a carton buy transaction?

Solution –

It will consist of a receipt having details of cash paid in exchange for carton, the date of the transaction, and the place from where it is bought.

Example #2

A company wants to buy a laptop for employees. What all would be included in an audit trail?

Solution –

The finance team will generate a purchase orderGenerate A Purchase OrderA Purchase Order (PO) serves as a legal document between buyer and seller, wherein, the buyer sends this contract that details the goods and services, date of delivery, payment terms as per the contract etc.read more to authorize a purchase. The store from which laptop is purchased will give the bill having details of the date of sale, amount, and description of the item purchased. All these documents will consist of an audit trail.

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For eg:
Source: Audit Trail (wallstreetmojo.com)

If you want to learn more about Auditing, you may also consider taking courses offered by Coursera –

1. Auditing I: Conceptual Foundations of Auditing
2. Auditing II: The Practice of Auditing

Advantages

Different users use it differently, depending on the requirements. Below are the significant advantages of this trail:

• Accountability: It sets accountability in terms of the actions of users. It prevents the introduction of improper information or unauthorized access to information. Further, every action of the user is recorded, which helps in tracing respective changes/modifications in the system.
• Reconstruction of Events: It can revive entire information and trace the basic details related to an event of who, when, and what. It helps in the detection of source problems and rectification of the same to prevent future occurrences.
• Intrusion Detection: It helps in identifying unauthorized access. Many regulations have made it mandatory for maintaining data confidentiality. It extends to the protection of intellectual property, financial records, personal information, etc.
• Problem Identification: Through real-time monitoring, audit logs identify problems that indicate operational issues, unusual or suspicious activities, or system errors.
• Prevent fraud- When proper records are maintained, it is easy to detect inconsistency. Also, since the users know that transactions are recorded and traceable, likely, they wouldn’t attempt such activity.
• Helps in audits- For most of the businesses, an audit is compulsory. When the trail is maintained for every transaction properly, it becomes easy for the auditors to determine the validity. It makes audit time and cost-effective. It also helps the auditorsAuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws.read more to rely on the internal controls of the company and help decide the ambit of the audit.
• Identification and correction of errors- It provides comprehensive and readily available information that can be examined easily to find out mistakes, if any.  Since it tracks everything, the mistake can be corrected at once and saves the time of multiple people fixing the error numerous times.
• Adherence to regulatory standards- To adhere to the regulatory standard, it’s crucial to maintain an audit trail. It helps in understanding the substance of transactions as and when required for legal purposes.
• Loan documents- Lenders require some proof of revenue and cash flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more before extending loans to a company. This trail keeps a detailed record of transactions that can help in providing necessary documents.

Limitations

• Challenge in maintaining audit trail including location used for access and storage
• The data logs can be heavy, which leads to an increase in storage costs.
• It sometimes gets difficult to strike a balance between data protection and operational performance.
• Losses of data through inappropriate use can cost a lot with direct damage to profits and reputation or legal action.

Conclusion

• Audit trail information should be stored in a secured location
• There should be the timely and regular backup of this trail
• Only useful information should be collected to avoid heavy storage cost
• Audit logs should be reviewed at regular intervals
• The system users should be aware of audit trails to ensure availability of trails

Recommended Articles

This has been a guide to Audit Trail and its meaning. Here we discuss the audit trail process with the help of flowchart and examples. You can learn more about auditing from the following articles –

• Management Audit Definition
• Compliance Audit
• Audit Materiality
• Meaning of Audit Evidence
• Interim Audit